Luxembourg: Economic growth stabilizes; Russia-Ukraine war to have limited impact on the economy
The Duchy’s economy grew 4.8% year on year in the fourth quarter, which matched the result logged in the prior quarter. The economy rebounded strongly overall in 2021 from the pandemic-induced contraction in 2020, with growth coming at 6.9% (2020: -1.8%).
The stable headline reading came as strengthening domestic demand was offset by a weaker performance from the external sector. Private consumption growth accelerated from 2.7% in the third quarter to 5.5% in the fourth. A tighter labor market offset the impacts of renewed Covid-19 restrictions—implemented on 19 October—and greater price pressures. Furthermore, government consumption increased 4.6% in the period, up from the 3.2% expansion recorded in the third quarter. Capital outlays, meanwhile, rebounded strongly in the period and grew 14.2% over Q4 2020, swinging from the 5.1% contraction recorded in the Q3 2021. This came on the back of more upbeat views on production and employment expectations in the months ahead, likely influenced by the less severe impact of the Omicron variant.
Turning to the external sector, exports of goods and services growth eased to 7.0% year on year in the fourth quarter from 8.0% in the third. This was likely affected by the disruptive impact of Covid-19 restrictions across the Eurozone in the period. Growth in imports of goods and services, however, picked up steam and came in at 8.7% in the fourth quarter, from the third quarter’s 6.8% expansion. As such, the trade balance surplus narrowed and the sector’s contribution to growth softened.
Lastly, economic growth was stable in the fourth quarter on a seasonally-adjusted quarter-on-quarter basis, matching the third quarter’s 0.5% expansion. This suggests that while annual growth eased, underlying conditions remained resilient.
Turning to the first quarter of this year, available data paints a mixed picture. While the rolling back of restrictions should support household consumption, rising commodity prices, especially after Russia’s invasion of Ukraine, will have eaten into consumers’ pockets through higher energy bills. The unemployment rate dropped to a 13-year low in January, which bodes well for spending; however, harmonized inflation skyrocketed to a record high in February. Meanwhile, business confidence improved in the first two months of the quarter, but disrupted supply chains and greater commodity prices due to the war in Ukraine should weigh on production. That said, Luxembourg’s private-sector economy is dominated by financial services and the economy’s exposure to Russia is rather limited. The impact of the Russia-Ukraine war on the overall economy should therefore be relatively small, despite heavy financial sanctions placed upon Russia.